Mechanics Bancorp

Good morning, ladies and gentlemen, and welcome to the Mechanics Bank Corp first quarter 2026 earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions with instructions to follow at that time. As a reminder, this conference call is being recorded. I would like now to turn the call over to Nathan Duda, Chief Financial Officer of Mechanics. Please go ahead.

Thank you, operator, and good morning, everyone. We appreciate you joining our earnings conference call. With me here today are CJ Johnson, our president and CEO, and Carl Webb, our executive chair. The related earnings press release and earnings presentation are available on the news and events section of our investor relations website. Before we begin, I'd like to remind everyone that any forward-looking statements are subject to those risks uncertainties, and other factors that could cause actual results to differ materially from those anticipated future results. Please see our safe harbor statements in our earnings press release and in our earnings presentation. All comments expressed or implied made during today's call are subject to those safe harbor statements. Any forward-looking statements made during this call are made only as of today's date and we do not undertake any duty to update such forward-looking statements except as required by law. Additionally, during today's call, we may discuss certain non-GAAP financial measures, which we believe are useful in evaluating our performance. A reconciliation of these non-GAAP financial measures to the most comparable GAAP financial measure can also be found in our earnings release and in the earnings presentation. CJ? Let me hand it over to you.

Thank you, Nathan, and good morning. We appreciate everyone joining our call and for your interest in Mechanics Bancorp. I'll kick things off today, and we'll summarize the highlights of our first quarter performance. I'll also provide another strategic update on the bank before handing things off to Nathan to review our financials in more detail. Carl, Nathan, and I will then open up the call for your questions. With that, let's turn to slide four. We had a productive first quarter, reporting $44.1 million in net income. On a fully diluted basis, our earnings per share was $0.19, and our tangible book value per share ended the quarter at $7.53, with $0.40 per share of dividends paid to investors in Q1. As anticipated, this was another noisy quarter, so I'll walk you through some of the major items. We recorded a $6.5 million provision entirely related to qualitative CECL factors tied to geopolitical uncertainty stemming from the Iran War. Importantly, this was not driven by any specific credit deterioration within our loan portfolios. Active quality metrics remain strong, and I'm pleased to report that we have zero basis points of net charge-offs when you exclude our auto net charge-offs. Our runoff auto portfolio, by the way, is also performing well as it winds down. This provision was a conservative response to the heightened global risk of the Iran War and its potential impact on the U.S. economy, particularly given the higher oil prices. Second, we incurred just under $5 million in merger-related expenses as we continued to work through the final phases of our home street integration. These costs were in line with our expectations and are nearing completion. The third non-core item was a $1.7 million tax provision related to the re-measurement of our deferred tax asset due to a lower anticipated effective tax rate moving forward for the company. For forecasting purposes, we expect our effective tax rate to be approximately 26.5% in 2026, but this could still move around a bit. When you adjust to the non-core items, it adds up to $53.8 million of core net income for the quarter, representing a core ROAA of 1% and a core ROPSI of 13%. The first quarter is always the seasonally weakest for us for both non-interest expenses and core deposits. On the deposit front, our seasonality primarily stems from our 860 million of food and ag deposit customers who see large inflows in December and outflows in January. This quarter, $137 million of our non-maturity deposit decrease was from these customers, which is normal course activity. Otherwise, core deposits were roughly flat. Importantly, we did see a $640 million reduction in CD balances during the quarter. This was deliberate, as we continued to hold the line on CD pricing and let hotter money from legacy HomeStreet customers leave the bank. When we modeled the merger over a year ago, we expected 1 billion in CD runoff by the end of the second quarter of 2026. However, runoff has been greater than anticipated, and we now expect 1.4 billion cumulative reduction in CDs, with overall mechanic CD balances expected to stabilize at a 2.0 billion run rate. This implies an additional reduction in CDs of just under 150 million in Q2. Notably, the vast majority of CDs leaving the banks were from single-account households, and our core deposit retention through the merger has been very strong. Also, nearly all of our CDs have repriced once at our lower rates and have maturities of seven months or less. While this elevated time deposit runoff has a negative impact on earnings, it's higher risk, low ROE, non-core money that's better to not have in our bank. Getting a bit smaller also generates excess capital which provides strategic flexibility. Staying on the topic of risk reduction, legacy home street construction loans also decreased nearly $100 million during the quarter, as we made the strategic decision to let certain business go that we felt wasn't priced appropriately relative to the credit exposure we were taking as a bank. In general, competition for loans and deposits remains quite stiff. We are OK getting a bit smaller in the near term to minimize risk to the company position ourselves for long-term success. Our total assets are now $21.4 billion, with total gross loans of $13.9 billion, total deposits of $18.2 billion, and tangible shareholders' equity of $1.7 billion. We remain 100% core funded, with no broker deposits or FHLB borrowings at 331, and I'm pleased that we paid off $65 million of high-cost senior debt in March that was acquired from Legacy Home Streets. Primarily because of the Iran war provision, our ACL grew five basis points this quarter to 1.13% of loans and now totals 157 million. Our allowance is also a very robust 2.95 times our total non-performing assets as of 331, with NPAs generally flat for the quarter. Our capital ratios remain healthy with a 13.9% CET1 ratio and an 8.7% Tier 1 leverage ratio. Our cost of deposits was 1.28% in the first quarter, down 15 bps from Q4, and our spot cost of deposits at 331 was 1.21%. Our NIM was 3.61% for the quarter, up 11 bps sequentially, and our CRE concentration ratio was 348%. Turning to slide five, I'd like to provide you with an update on some of the key strategic initiatives happening at the bank. I'm very happy to report that we successfully converted all legacy HomeStreet customers onto our core banking platform the final week of March. This major milestone was achieved thanks to a tremendous amount of planning and hard work from all our employees. We will substantially complete our merger integration during the second quarter and expect to realize significant additional expense synergies moving forward as we will not be paying two core providers, other redundant contracts will be terminated, and final headcount reductions occur. We remain on track to deliver on our budgeted cost synergies from the merger and reiterate our prior guidance of achieving an annual run rate non-interest expense, excluding CDI, of approximately $430 million by the fourth quarter of this year. The $130 million sale of our dust business line to Fifth Third has taken a bit longer than expected, but we have a high degree of confidence that it will close in the second quarter. Given the pending dust sale, our first quarter earnings, and our modestly smaller balance sheet, we will have significant excess capital, and we expect to pay approximately 70 cents per share in dividends in Q2, subject to regulatory and board approval. Merger integration is almost behind us after a very full year of work, and the build-outs of our wealth, commercial banking, and treasury sales teams are substantially complete. It will be nice to move past integration work and focus entirely on growing each of our core business lines with a technology roadmap for the bank that is increasingly focused on leveraging AI tools to improve enterprise productivity. As for the big picture, we expect a relatively flat NIM for the next two to three quarters as auto loan runoff remains a drag and our deposit costs stop declining given we no longer expect any Fed rate cuts and our CD repricing moderates. Our name should begin expanding again in early 2027 as the impact of auto fades, driven by legacy mechanics bank earning asset repricing, which will continue to occur over the next five years and will provide a tailwind to earnings growth. We now expect to deliver a 17% to 18% ROTC and a 1.3% to 1.4% ROAA in 2027 and beyond, with a projected gap debt income range of $275 to $300 million for 2027. Our earnings guidance has been reduced primarily due to removing two Fed rate cuts from our projections, as well as from a modestly smaller balance sheet due to the lower CD balances. We also expect outstanding construction loans to decline to roughly $300 billion over the rest of the year versus $500 billion previously. Let's look at slide six, which shows an overview of Mechanics Bank's work today. Again, we have $21.4 billion in assets with 166 branches, and very competitive deposit market share. We are the fourth largest community bank in both California and on the West Coast, with a branch map that's nearly impossible to replicate. We fully expect Mechanics to be a high-performing bank, despite taking very little risk with our earning assets strategy. On the left-hand side of the page, we compare Mechanics to all publicly traded banks, 10 to 100 billion in assets, which, including us, now has 77 banks in the comparative group. As you can see, our cost of deposits for the first quarter was 1.28% versus the median, the 77 banks, of 1.76%, giving us a rank of number 10. And I expect our cost of deposits to continue to drop in the second quarter before flattening the remainder of the year. Next, our non-interest-bearing deposit mix is 36%, which is third out of 77, up one spot from a quarter ago, and the greatest store of value for our company. Our CET1 ratio of 13.9% ranks 19th, and our risk-weighted assets to total assets is just 59% versus the group median at 76%, which is the second lowest out of our 77 competitor banks nationwide. Despite this low risk profile, our expected 2027 ROPSI of 17% ranks eighth out of the 77 banks, which would be exceptional. Finally, our 2027 efficiency ratio is now projected to be approximately 50%, which ranks 22nd out of 77 despite our operating in higher cost markets and with the majority of our deposits comprised of small balance consumer accounts. Slide seven is key to our investment thesis and another way of visualizing some of the important statistics from page six. The strength of our deposits and the efficiency with which we run our bank goes from an expense and a capital management standpoint will allow us to post very strong returns despite having nearly the lowest risk mix of assets in the country. These charts provide a great visual, in my opinion, especially the risk-weighted assets to total assets comparison. In fact, we expect our risk-weighted assets as a percentage of total assets to continue to come down over time as our auto loans run off and our CRE concentration ratio is managed below 300%. While we will pay substantial dividends the first half of 2026, We expect moving forward that our dividend payout ratio will be closer to 80% of net income as you retain some capitals to support core growth and preserve strategic optionality. To wrap up my section, let's turn to slide eight. This slide summarizes our investment highlights. First and foremost, we have very strong market share across the West Coast with a branch footprint that's nearly impossible to replicate. We also expect to have very strong profitability due to our top-notch deposits and efficient business model, despite taking very little credit risk. We are 100% core funded with no wholesale borrowings or broker deposits and are highly capitalized with a very liquid balance sheet with 70% loans deposit ratio forecast for 2027. We are efficient with our capital and plan to pay off substantial dividends, which would imply a very effective yield at today's share price. There's also firm alignment between our public and private investors, as Ford Financial Fund owns 74% of the company. Finally, we have an experienced management team with a strong operating and M&A track record. Overall, the future prospects and mechanics are quite bright, and I'm looking forward to finishing the job with the HomeStreet integration and moving on to the next chapter of growth for our great company. With that, let me turn the call over to Nathan to dig into more detail on our first quarter results. Nathan?